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Earnings impacted by higher SUG expense; valuations cheap
* Gujarat State Petronet (GSPL) reported EBITDA/PAT of Rs3.53bn/1.74bn, up 19%/down 4% yoy, down 13%/46% qoq and 12%/22% lower than our estimates due to higher-thanexpected Other Expense which had Rs300mn of SUG adjustment. Other Income was also lower than our estimate at Rs76mn while the tax rate of 34% was higher.
* Gas transmission volume at 34.5mmscmd was down 2% qoq (up 3% yoy), largely in line. The sequential volume drop was contributed by some dip in Reliance and power sector volumes though partially offset by other sectors. Average tariff realization was down 3% qoq at Rs1.42/scm, 3% lower than our estimate.
* GSPL’s near-term volumes are likely to be impacted by the ramp-up of RIL’s petcoke project though would be later offset by new gas sources like Cairn Rajasthan and Mundra LNG terminal ramp-up. We cut our FY19/20/21E EPS by 7%/9%/11%, building in higher expenses, while reducing TP by 7% to Rs210. We maintain Buy due to cheap valuations.
* Management Guidance:
Management has highlighted lower SUG in earlier years (FY18 it was negative Rs20mn) as the reason behind higher run-rate this year, and going forward expects it to reverse. Tax rate guidance is a normal 33-34%. There has been no communication from RIL on lowering volumes and no official update on petcoke project commissioning. Currently, volumes are at 32-33mmscmd with RIL taking under 10mmscmd. Tariff review with the PNGRB is likely to come in Q1FY20, post tariffs of other players (such as GAIL) having finalized. GSPL does not expect much change as against higher RIL-led volumes in FY18/19, opex/capex assumptions would also go up in the review. Gas-based power sector demand is weak.
* Outlook and Valuation:
We note that GSPL’s near-term volumes would be impacted by the ramp-up of RIL’s petcoke gasification project, and our channel checks suggest that RIL’s current R-LNG intake is ~8mmscmd which could further go down to 4-5mmscmd as its petcoke project starts operating at optimal capacity. However, against this, new gas supply sources like Cairn’s Rajasthan fields, Mundra LNG terminal and Dahej LNG expansion would ramp up. Hence, we maintain our volume estimate of 34/30/32mmscmd for FY19/20/21. However, we raise our expense assumption with an increase in employee costs and higher Other Expenditure. We also lower our book tariff slightly along with Other Income. Hence, we reduce our FY19/20/21E EPS by 7%/9%/11% and our DCF-SOTP based target price by 7% to Rs210, with Rs79 coming from Gujarat Gas (30% discount to FV). We thereby maintain our Buy rating. The bottoming out of volumes and stable expenses remain key upside triggers.
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